Binary options are speculative financial instruments that derive their value from some other asset or quantity. Eventually, the options are either completely worthless or become worth a specific calculable amount in the future in the high-low style of binary options popular outside of the United States of America. This article examines how high-low binary options work in theory and how they are purchased on BIOPset V3.
The third release of BIOPset (BIOPset V3) is still in beta and constantly tweaked. This is a very risky platform. Do not even think about using your life savings on this platform!
Binary options are essentially all or nothing financial derivatives. Traders either win or they lose. There’s no in-between (or other possible outcomes).
They are called derivatives because their value is derived from something else after a certain period of time. After that period of time, the options are said to have expired. That something else from which binary options derive their value is called the underlying (or underlying asset).
Speculation
In BIOPset V3, the underlying asset is ether (or ETH). However, the underlying needn’t be a financial asset or cryptocurrency. It could be the quality of the weather (like a rainy day) or something else that will have an attribute that changes in the future. [1]
Binary options are speculative instruments. Those that purchase them (options buyers or options holders) usually have a strong opinion about the future state of some phenomenon. In BIOPset V3, traders that buy binary options typically have a serious opinion about the future price direction of ETH.
More precisely, traders are actively engaged in forecasting the direction of the movements in the price of ETH. They are not passively buying options because they want to save money. WARNING: never use your savings.
Traders use the platform to make money based on what (they think) they know about the future.
Calls And Puts
Traders that want to make money on an appreciation in the price of ETH purchase calls. Those prognosticating a price decrease purchase puts.
Only price direction matters.
It never matters how much the price increases or decreases. In BIOPset, call holders win whether the price of ETH increases by one dollar or one thousand dollars. Similarly, put holders win whether the price of ETH decreases by one dollar or one thousand dollars.
Rights And Obligations
Traditionally, options give holders the right to either buy or sell the underlying. Holders are never obliged to exercise this right, but if they do, they exercise their options. The options are then settled physically. [2]
Physical settlement is the primary reason traditional options are used for hedging. Binary options are also settled, but they are never physically settled.
Option Moneyness
The “settlement” of binary options is very straight forward. Binary options are either worthless (or out-of-the-money or OTM), or not (or in-the-money or ITM). OTM options give holders nothing back on settlement.
For example, if you purchased 10 ETH worth of call options and the price of ETH never appreciated before option expiration, then you get nothing. Your 10 ETH is lost forever and you sustained the maximum possible loss of 100%. The yield is -100%.
ITM binary options give a maximum possible payout of 100% of the quantity purchased when exercised by the option holder. [3]
For example, if you purchased 10 ETH worth of call options and the price of ETH appreciated before option expiration, then you get 20 ETH. Your 10 ETH is returned and you made the maximum possible profit of 100%. The yield is 100%.
Strike Price
On BIOPset, call holders can exercise their options anytime the price of ETH exceeds the strike price. Put holders can exercise their options anytime the strike price exceeds the price of ETH.
The strike price of a binary option on BIOPset is simply determined. It is the price of ETH at the moment the option was purchased according to the Chainlink Oracle. It is always listed on the BIOPset UI. Take note of it when you purchase the option.
Expiration
At expiration, binary options are always worthless (or possess zero intrinsic value). The intrinsic value that they possessed has decayed. At that point, the right to exercise them no longer exists.
In BIOPset V3, the future is always only one hour away. Options always expire after 60 minutes. Consider it a fancy way of stating that your options are worthless after an hour.
Traditionally, options expire after longer periods of time. It seems like BIOPset is geared towards the impatient. Things are not as they seem though. [4]
Thanks to smart contract design, BIOPset options cannot completely expire on their own. Expiration requires intervention. Human intervention is incentivized by offering a 5% expiration fee.
Consequently, the call or put holder can expire the option themselves and collect that 5% fee. In such cases, the payout of the option is 100%.
Otherwise, any arbitrary platform participant can expire the option if it is in their financial interest and collect the 5% fee. In such cases, the payout of the option drops to 95% (as 5% is paid to the person/bot that expires the option).
Risks
There are risks to everything in life. Relatively speaking, it’s super risky to buy binary options (and even more so on BIOPset). BIOPset’s contracts have not been professionally audited. So trading entails smart contract risk.
Furthermore, the platform will eventually be governed by BIOP token holders. Token holders are incentivized to make the platform more beneficial to options sellers. No doubt, options sellers will hold a lot of BIOP and constantly configure governable platform features to provide a greater yield to liquidity providers. [5]
For step-by-step instructions on purchasing binary options on BIOPset, please refer to this guide.
[1] BIOPset uses Chainlink Oracles. Technically, there may be a day when you can purchase options on the weather via BIOPset if Chainlink makes the oracle.
[2] With physical settlement, the call holder takes delivery of the underlying and the put holder makes delivery of the underlying.
[3] If the option is not exercised by the option holder, the maximum possible payout is 95%.
[4] The longer the expiration, the more favorable the options are to buyers.
[5] At BIOPset, traders can pool their funds with other traders to sell (or write) binary options on ETH. They represent the counterparty to options buyers.
